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Chances are you hear the phrase bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, soil, and striking it rich. As it turns out, that analogy isnt too far away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers that solve complex computational science issues (read: so complex that they cannot be solved by hand). The luck and work required by a computer to solve one of those problems is the equivalent of a miner striking gold in the ground while digging in a sandbox.
The end result of bitcoin mining is twofold. To begin with, when computers resolve these complex math problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and protected, by verifying its transaction information. .
Theres a fantastic chance all that only made so much sense. In order to explain how bitcoin mining works in detail, lets begin with a procedure thats just a little bit closer to home: the regulation of printed currency.
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Consumers tend to anticipate printed currencies, at least in the United States. Thats because the U.S. dollar is backed with a central bank called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of copyright currency. .
Even electronic payments using the U.S. dollar are backed by a central authority. When you make an online order using your debit card or credit card, for instance, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, which is one reason that your debit or credit card may be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is endorsed by millions of servers throughout the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but using a few key differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we call that a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in cubes and adding them to a public document known as the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that these transactions are accurate. (More on the wonder of the way this happens in a second) In specific, bitcoin miners be certain that bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 in the shop, that invoice is in the clerks hands. With digital currency, however, it is a different story. .
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When the numbers were identical, then the clerk would know the money had been replicated. This analogy is similar to what a bitcoin miner does when they verify new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying each of those transactions can be a lot of work for miners, which gets at one other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are given bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it had been 25, at the time of writing it is 12.5, and sometime in the middle of 2020 it will great site halve to 6.25. .
At this rate of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to make.
Here is the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. First, they must confirm 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are more often several thousand, depending on how much data each transaction stores.